STOCKS: China Eyes Quick Route Home for Offshore-Listed Firms

Bottom line: A new plan allowing offshore
listed Chinese firms like Alibaba and Tencent to make secondary
listings at home appears to have momentum and could stand a better
than 50 percent chance of success.

A mix of politics and business
is in the air this week, as the annual National People's Congress
takes place in Beijing, including a concurrent gathering of
business leaders who advise the nation's legislature. Those leaders
include most of the country's leading high-tech CEOs, who are all
getting peppered with questions about whether they would re-list at
home if given the chance.

Most of those leaders are doing the politically correct thing
and saying "of course," including chiefs of Internet giants
Baidu
(Nasdaq: BIDU), Tencent
(HKEx; 700) and Ctrip
(Nasdaq: CTRP), just to name a few. (Chinese article) Such
talk is really a bit cheap and would be quite impractical in the
current market, since de-listing such massive firms from their
current markets would require tens of billions of dollars in most
cases, and even hundreds of billions in the case of a massive
company like Tencent.

But what has people buzzing this year is word of a new plan that
would see Beijing roll out a China Depositary Shares (CDR) program
similar to the popular American Depositary Shares (ADS) program now
used in the US. Such programs allow companies with primary listings
in one market to make major secondary listings in other markets.
The program is quite popular in the US, with major China- and Hong
Kong-listed state-owned enterprises like
PetroChina (HKEx: 857; NYSE: PTR),
Sinopec (HKEx: 386; NYSE: SNP) and China
Mobile (HKEx: 941; NYSE: CHL) all trading in New York
using ADSs.

With that fact in mind, media are reporting that China is now
considering its own CDR program that would provide a fast and easy
way for many of the nation's offshore-listed tech and other
venture-backed companies to return home. (English
article) An article from Caixin, one of China's leading
business publications and my current employer, says the Chinese
securities regulator is currently studying several plans to lure
home overseas-listed firms, and the CDR plan is one of those.

The plan appears to be quite advanced, according to the report,
with eight firms already hand-picked to trial the CDR program.
Seven of those are the biggest overseas-listed tech firms, namely
Alibaba
(NYSE: BABA), Baidu, Tencent, JD.com
(Nasdaq: JD), Ctrip, Weibo
(Nasdaq: WB) and NetEase
(Nasdaq: NTES). The eighth company on the list, Hong Kong-listed
Sunny Optical (HKEx: 2382), is one that I've never
heard of, and I'm sure there's some kind of backroom story that
enabled it to make it into this prestigious group.

Advanced State

The fact that such a specific list of companies is being
discussed seems to indicate the plan is probably quite advanced and
perhaps could come to fruition soon. But that said, we should also
point out this kind of effort has been tried before and ultimately
failed. The most ambitious program was previous plans for an
separate, Shanghai-based international board that got discussed
several times but was ultimately shelved.

More recently we've heard frequent discussion of allowing these
overseas-listed companies to jump the queue when applying for
domestic listings. Many companies like Alibaba eschewed China
listings for a number of reasons, but one of the biggest was due to
the long wait times for approval due to a big backlog of
applicants. This is partly due to the regulator's decidedly
anti-market approach, which sees it frequently slow or completely
stop approval of new IPOs during times of market volatility.

This new CDS program would help to get around all of that, since
such shares would technically not require a formal IPO review and
thus could still be considered even during these IPO bans. What's
more, the process should theoretically be much simpler, since all
of these companies are already listed overseas and thus have
already been vetted by the US or Hong Kong securities regulators,
which are both quite capable.

This new plan would have the big advantage of allowing both
western and Chinese investors to buy into these popular companies.
It would also avoid the complex and costly issue of privatizations
from New York and Hong Kong and re-listings in China that some
companies have already tried. For all those reasons, I'm guardedly
optimistic that perhaps this latest plan to bring home
offshore-listed Chinese firms could stand a better than 50 percent
chance of success. But I also wouldn't be surprised if it
ultimately falls apart, repeating a pattern we've seen quite a few
times in the past with this kind of reform.